Crushed Spirits

“A cheerful heart is good medicine, but a crushed spirit dries up the bones.”

-Proverbs 17:22

Four goals in 400 seconds for Germany, and all of Brazil was #crushed. Sometimes risk happens slowly, then all at once.

Back to the Global Macro Grind…

Whether it was the Russell 2000 (-3% in 2 days) or Biotech (IBB) stocks (-5% in 2 days) … or whatever all-time-bubble-high mo mo stock that started blowing up in March that’s re-blowing-itself-up this week, you do not want to be the guy in this game who got crushed.

Been there, done that. If you’ve never been crushed, you will be. This is what people on the buy-side actually talk about. The not so subtle secret about this profession is that almost everyone I know on the buy-side talks about everyone else’s performance.

I had a fair amount of feedback by simply citing AQR’s contention that hedge fund correlation is high right now. To be fair, calling it high isn’t fair though. It’s at all-time highs!

In our Q3 Macro Themes presentation on Friday (11AM EST, ping for access), we’ll show you a lot more than just hedge fund historical performance correlations – we’ll show you Volatility’s Asymmetry, across all of Global Macro including:

Fixed Income Volatility at generational lows

Foreign Currency Volatility at all-time lows

Commodity Volatility at cycle-lows

Yep. Somewhere in between the generational low and the all-time low, I think we’ll all agree is pretty low. But not everyone will agree that it’s not different this time (that’s where we differ!).

Not surprisingly, as volatility dries up so does volume. You can ask you friends who work on the Old Wall what trading volumes are like in either FICC or Equities right now. I’m sure their day-to-day flow isn’t going to make you want to run out and build a broker dealer.

The Fed, of course, is who you can blame for this. The Policy to Inflate asset bubbles to all-time-highs (and never call them bubbles) is in and of itself a bubble. At the same time that they’re trying to ban economic gravity, they’ve all but eviscerated volatility (for now).

In an interview Cliff Asness (he runs AQR Capital Management and did the hedge fund beta piece) had with Morningstar a few weeks ago, he made a very simple summary point about all of this: “The average still can’t beat the average.”

So, don’t be average. Fade beta.

#FadingBeta is a very profitable risk management strategy, especially at the immediate-term momentum turns.

We’ve built our own models to signal when those phase transitions are most likely to take place. And I think, across big macro asset classes, we have done a better than bad job at calling lots of big macro turns since 2008.

Then you get a sharp move off that high, on accelerating volume and rising volatility…

Then the asset price makes a series of lower-highs, and snaps its intermediate-term TREND

Metaphorically, I call this the #waterfall. In my risk management model, when something does all 3 of the aforementioned things AND I have the research team support the why (as in why it can continue, with catalysts), we have ourselves what we call a short idea.

You can call it #FadingBeta, short selling momentum, or just not being the guy who bought Go-Pro (GPRO) at $48 last week. There are many ways to use this weaponry so that you don’t get crushed.

I’m not saying that being a levered long momentum investor doesn’t work. I’m just reminding you that A) it’s not a new strategy B) lots of funds are using it and C) when it unwinds from it’s all time high in AUM, it gets crushed (see March-May 2014 for details).

Poll of the Day Recap: 63% Voted The 10-Year Treasury Yield is Headed Lower

All year long, consensus has been consistently wrong on bonds, arguing that rates were headed higher. Hedgeye has been on the other side of that trade. We have been advising our subscribers to buy bonds, that U.S. growth was slowing, and that yields were going to continue falling as a result.

In the video below CEO Keith McCullough discusses the positive correlation between the 10-Year Treasury yield and the direction of U.S. growth and how it is one of the key influences which will cause the 10-Year Treasury yield to surprise to the downside in Q3.

We wanted to know what you thought. Is the 10-Year Treasury yield heading higher or lower in Q3?

At the time of this post, 63% voted LOWER,37% voted HIGHER.

Those who voted the 10-Year Treasury yield is headed LOWER reasoned:

U.S. economy's growth stocks have peaked. 2014 has been and continues to be strong for slow-growth stocks/entities/bonds for the foreseeable future. Given the lack of substantive U.S. growth (sustained 3.5%+), monetary policy will continue to produce inflating costs in stuff and asset prices until it can't. Currently, the Fed still can, so bonds, commodities, and slow-growth entities is where the market is positioning in this environment.

The world still sees the U.S. treasury’s market as the "best house in a bad neighborhood" and they believe the Fed will ultimately give in on the Taper.

That is what the bond market is telling us currently. So unless, the Fed changes course in the next 90 days, the yield should remain flat to lower.

If last Thursday's job number can't get the 10 yr yield excited, I don't know what will.

Voters who said the 10-Year Treasury yield is headed HIGHER had this to say:

Wal-Mart CEO's Not-So-Good News for U.S. Consumers: 'It's Not Getting Any Better'

Takeaway:When Wal-Mart's CEO talks about the US consumer, we listen.

Editor's note: This is a brief excerpt from Hedgeye retail sector head Brian McGough's morning research.Click herefor more information on subscribing to Hedgeye.

U.S. job rebound not spurring spending, Wal-Mart's Simon says

"In an interview with Reuters, Bill Simon, the president and chief executive officer of Wal-Mart U.S., said the improving employment picture had so far failed to raise cash register receipts at the retailer's U.S. stores. 'It's really hard to see in our business today … that it's gotten any better,' he said."

“'We’ve reached a point where it’s not getting any better but it’s not getting any worse – at least for the middle (class) and down.'"

"Simon said Wal-Mart's lower- and middle-income customers appeared to have made a number of changes to their shopping habits that were 'not the best thing in the world for a retailer,' splurging on events like back to school and holidays like the Fourth of July, but pulling back spending in between. 'They’re adapting to what has been a difficult macroeconomic situation,' he said."

Takeaway: Nothing earth shattering here, but when Wal-Mart (WMT) talks about the US consumer we listen. The company has over 30 petabytes of shopper data to draw conclusions from. All in, this is not a ringing endorsement for the median American consumer. And it doesn’t bode well for our two least liked names in this space - Target (TGT) and Kohl's (KSS).

When we looked at shopping intent over the last 3 quarters, WMT was the only retailer in the space with positive readings, so if it is still feeling the macro heat then that pain is being felt across the rest of the industry.

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